Is buying a foreclosure online a bargain?

Iris Price | Improvement Center Columnist | January 28, 2016

A foreclosure signAre you a homebuyer thinking about how to buy a foreclosure to save money? According to the National Association of Realtors (NAR), the foreclosed properties in November 2015 sold at an average of 15 percent below market value. RealtyTrac, an online marketplace for foreclosed homes, reported for the same month that the median price of a bank-owned property was 37 percent less than that of a non-distressed home. Regardless of whose figures you believe, the purchase price of a foreclosed home is typically below market value.

While foreclosure activity appears to be showing "a remarkable improvement" according to Dr. Frank Nothaft, chief economist with CoreLogic, a property information, analytics, and data-enabled services provider, Nothaft says "there are still pockets of areas with high foreclosure activity." CoreLogic reported an inventory of 448,000 foreclosures in November 2015, the lowest since November 2007.

Knowing how and where to buy foreclosed homes may tempt you to score the deal of the decade, but before you get carried away, here are some facts and tips for buying foreclosed homes to help you decide whether that's the best home buying strategy for you.

Where to buy foreclosed homes

Where can you find the largest inventory of foreclosed homes? Despite fewer homes last year in some stage of foreclosure -- default, on the auction block, or bank-owned -- as of November 2015, New Jersey, New York, Hawaii, Florida, and the District of Columbia had, in that order, the highest inventory of foreclosed homes. Fifteen other states, including Maine, New Mexico, Nevada, Connecticut, and Pennsylvania, also had above the national average foreclosure rate of 1.2 percent.

If you happen to be looking for a foreclosure in those states, you might have a bit more to choose from, but you don't have to relocate to hunt for a bank-owned property. You can find them online or in person in your own neck of the woods. Likewise, if you don't want to limit your horizons, you can use the same search and purchase methods from afar, especially if you plan to purchase by online auction.

How to buy a foreclosed home

  • State regulations vary. Buying a foreclosure differs from purchasing a home that the owner is selling. The seller of a foreclosed home is a bank or government agency. If you are looking outside your own state, familiarize yourself with how their foreclosure purchase procedures differ from those in your location. You can start by contacting the lender's real estate agent, whom you can typically find with the property listing, or find a buyer's real estate agent experienced with foreclosures who can guide you through the process and intercede on your behalf.
  • Do an online search for properties. You can search for a real estate owned (REO), meaning bank- or lender-owned property, online as you would a non-distressed property. Search the term "foreclosures" or "REO properties" and your geographic area of interest.
  • Get pre-qualified for how much you can borrow. If you don't plan to pay with cash, get pre-qualified from your own lender so that when you find the property you want, you can show proof of how much you can borrow based on your credit-worthiness. Bank-owned property sales can move very quickly, so it's best to be prepared.
  • Base your offer on comparables. "Comps," or the selling price of other homes in the area, help determine the market value of the property even if it's in foreclosure. Sometimes the bank lists the property too low or too high, or you are competing with many other potential buyers. You may be expecting to save a lot of money buying a foreclosure, but don't make the mistake of low-balling your offer and losing out to another buyer.
  • Auctions. There can be two types of auctions for foreclosed homes. The first occurs when the home has been in default for 90 days and the bank forecloses on it. At that time, the property goes to auction and typically becomes the property of the bank. This is when it's listed with their real estate agent. After the home has been marketed by their agent without selling, it may go to auction a second time. This is usually the time when buyers have a chance to bid for the property either in person or online.
  • Fannie Mae HomePath. Fannie Mae markets foreclosed properties in which they are an investor through HomePath.com. Your real estate agent can submit your offer for one of their properties to the listing agent.

Tips for buying a foreclosed home

While the price may be right, keep these tips in mind when you consider purchasing a foreclosure:

  1. Have it inspected. REO properties are sold "as-is." Unless you can have the home inspected, you may end up in over your head with repairs. Knowing the extent of needed repairs can work to your advantage if you can roll the costs into an FHA 203(k) Renovation Loan at the time of purchase.
  2. Do a title search. If there are liens against the property or inconsistencies with the deed, you may not find out until the closing process begins.
  3. Verify whether financing is available. Properties in disrepair may be undervalued during the appraisal, which could disqualify your loan application for conventional financing.

Due to the special nature of foreclosed properties, you may decide buying one is not for you. If you do decide to pursue it, work with your own real estate agent and a home inspector familiar with foreclosures.

About the Author

Iris Price is a single Baby Boomer whose antidote to a lack of retirement funds was to launch a long-delayed career as a writer. While others her age concoct bucket lists and travel the world, she bought a new-construction home and obsessively creates lists of must-have home improvements and personal realization goals. She specializes in writing about home services and self-motivation.